Helping seniors preserve health and financial security for themselves and their loved ones.

Tuesday, July 9, 2013

Should you worry about Death Taxes?

Many
Pennsylvania seniors share similar financial and estate planning goals. We want
to be sure that we have enough resources to provide for our needs during our
lifetime. And we want to pass a little something – as much as possible really -
on to our families after our deaths.

For
most of us, death taxes are a nuisance, but won’t prevent us from reaching
these planning goals. Death taxes don’t affect our lifetime financial security
because they only come into play when we die.And with proper planning they won’t affect the financial security of our
spouse because in most cases there is no tax on what we leave to our surviving
husband or wife.

For
most of us death taxes hit our families only when both spouses are gone and our
home and savings pass to our children or other heirs.At that point, they usually do take a bite.

Here
is my simplified overview of how death taxes apply for Pennsylvania residents. Pennsylvania
families face two forms of death tax, state and federal.

Federal Transfer Taxes: The federal government imposes a set of taxes (estate,
gift, and generation-skipping) on the transfer of wealth. Generally, there is
no tax on what you leave to your spouse or charity. And there is no tax on the first $5.25
million (in 2013) that passes to your other heirs.

If
you do have an estate of more than $5.25 million, you need to plan to avoid federal
transfer taxes. The tax rates are high – the federal estate tax is 40% on the
excess - but that tax can be greatly reduced or eliminated by good advance
estate planning.

While
a 40% death tax is severe, it doesn’t affect many people. Less than 1% of all estates are subject to
federal estate tax. For most of us, it is not a worry.

Pennsylvania Inheritance Tax: The Pennsylvania inheritance tax, does affect the
things that most Pennsylvania residents leave to their children and
grandchildren after their deaths. It
will impact most Pennsylvania families.

Inheritance
tax is imposed as a percentage of the value of a decedent's estate transferred
to beneficiaries by will, heirs by intestacy (where there is no will) and transferees
by operation of law (for example, by trust). There is no bottom threshold –
even small estates are subject to PA inheritance tax. The tax rate varies
depending on the relationship of the heir to the decedent.

The
rates for Pennsylvania inheritance tax are as follows:

-0 percent on
transfers to a surviving spouse or to a parent from a child aged 21 or younger;

-15 percent on transfers
to other heirs, except charitable organizations, exempt institutions and
government entities exempt from tax.

Direct
descendants (4.5% rate) include all natural children of parents and their descendants
(whether or not they have been adopted by others), adopted descendants and
their descendants and step-descendants. Lineal heirs (4.5% rate) include
grandfathers, grandmothers, fathers, mothers and their children. Children
include natural children (whether or not they have been adopted by others),
adopted children and stepchildren.

There
are some inheritance tax exemptions written into the law. The proceeds of life
insurance policies on the decedent’s life are not taxed, and special rules may
apply to IRAs and other retirement plans.

Inheritance
tax payments are due upon the death of the decedent and become delinquent nine
months after the individual's death. If inheritance tax is paid within three
months of the decedent's death, a 5 percent discount is allowed.

Planning Implications:

While
the Pennsylvania inheritance tax can take a bite out of your estate, it is
rarely devastating. Let’s say that when you die, your leave your home and
investments to your children and that the value of the inheritance is
$300,000.The PA inheritance tax would
be 4 ½% of that, or $13,500, and the children would receive $286,500.

For
many Pennsylvania seniors a much bigger risk to their goals of lifetime financial
security and passing along an inheritance is the possibility that their life savings will
be used up paying for their care before death. Most seniors require care during
an extended period of time prior to their deaths. The cost of that care, whether
it is received at home, in assisted living, or in a nursing home, can quickly
deplete a modest estate.

For
most seniors, it’s the cost of long term care rather than death taxes that
should be the focus of advance planning. Expert long term care advance
planning with the help of an elder law specialist can help ensure that seniors will
be able to:

* remain financially independent,

* maintain control,

* maintaining privacy,

* involve family members without burdening
them,

* maximize available government programs, and

* leave an inheritance.

Pennsylvania
seniors and their families can get expert planning guidance at any one of the four
offices (Williamsport, Wilkes-Barre, Scranton and Jersey Shore) of my law firm,
Marshall, Parker and Weber. The
initial consultation is free of charge.

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About Me

I am a Pennsylvania lawyer with over 35 years experience in estate planning and elder law. I was selected by US News Best Lawyers® as its Lawyer of the Year in Elder Law for 2014 for the Harrisburg, Pennsylvania metropolitan region.
I am of counsel to Marshall, Parker and Weber, a law firm which has offices in Williamsport, Jersey Shore, Wilkes-Barre and Scranton, Pennsylvania. I am past President and a founder of PAELA (the Pennsylvania Association of Elder Law Attorneys). However, the views expressed on this site are my own and not those of PAELA or of Marshall, Parker and Weber.
Most importantly I am a husband, father and grandfather.